Implications of

1
Implications of QRS-11 Cases

• American Conference Institute
• December 5, 2006
• Kevin Wolf
• Partner, Bryan Cave LLP
• kwolf_at_bryancave.com
• 202-508-6113

2
Opening Remarks

• As an attorney involved in the investigation and
  the settlement, I will neither praise nor
  criticize the (March 2006) settlement. A
  settlement is a settlement is a settlement.
• Draft Charging Letters (DCLs) are at
  http//pmddtc.state.gov/consent_agreements.htm
• There are, however, many DDTC statements in the
  DCLs that exporters and manufacturers should take
  to heart. The principle behind the QRS-11 cases
  is not limited just to the export of QRS-11
  chips.
• Standing request for export control humor in
  addition to the four jokes and the eight
  Dilbert cartoons that already exist.

3
Quick Background -- The QRS-11

• The QRS11 is a MEMS technology solid-state gyro
  on a chip.
• http//www.systron.com/pro_QRS11.asp
• http//chinameasurement.com/engshowpro.asp?id388

Chip is about the size of a quarter
4
QRS-11 Basics from DCL

• Technology developed in 1980s. DCL 10.
• Chip was a component in Commercial Standby
  Instrument Systems (CSISs or ISFDs) built
  overseas in late 1990s. DCL 10.
• CSISs are FAA-approved back-up instruments to
  provide altitude, attitude and airspeed
  information to pilots if their primary flight
  instrument systems fail.

5
QRS-11 Basics from DCL cont.

• DDTC transferred jurisdictional control over
  CSISs to BIS in early 1990s. DCL 27.
• Boeing never purchased or exported the chips, but
  beginning in 2000, purchased and installed many
  CSISs containing QRS-11s for use in its
  commercial aircraft, many of which were exported.
  DCL 21.
• DDTC had declared the chips to be
  ITAR-controlled. DCL 7.

6
Jurisdictional Status of QRS-11s Today

• In January 2004 -- after issue arose in fall
  2003 -- DDTC amended USML to remove QRS-11s when
  integrated into and included as an integral part
  of a CSIS for use on a civil aircraft or
  exported solely for integration into such
  systems. 69 Fed. Reg. 873 (Jan. 7, 2004) and 69
  Fed. Reg. 5928 (Feb. 9. 2004).
• QRS-11s remain ITAR-controlled if used in (i)
  military aircraft or military other end-items or
  (ii) simulators for civilian or military
  aircraft. USML Cats. VIII(e) and XII(d), (e)
  (2006)

7
See Through Rule

• DDTC does not use the term.
• Characterization is that parts and components
  that are ITAR-controlled do not cease to be
  ITAR-controlled by virtue of their incorporation
  into items specifically designed for and used in
  civilian end-uses. DCL 28.
• Paragraph 5 of Consent Agreement (see next page)

8
Paragraph 5 of Consent Agreement

• EO 11958 and the AECA authorize DDTC to
  designate what is a defense article or a defense
  service and the ITAR require written
  authorization before such articles are exported
  regardless of whether the underlying defense
  article is used in a commercial system or
  product.
• The ITAR, through the Commodity Jurisdiction
  (120.4) process, is the only official mechanism
  by which questions regarding jurisdiction and
  categorization may be addressed.

9
Clearing Up Two Misconceptions

1. DDTC did not declare the commercial aircraft or
   the commercial navigation devices exported to be
   ITAR-controlled. Rather, the chip inside of the
   devices was ITAR-controlled and the chip was what
   required a DDTC license to export or reexport.
2. Paragraph 5 does not mean exporters cannot make
   self-determinations about whether something is or
   isnt ITAR-controlled. BUT if something was (i)
   specifically designed or modified for military
   end-items or (2) declared by DDTC to be
   ITAR-controlled, then only DDTC can declare it to
   be EAR-controlled through the CJ process.

10
Principal Implications

• Anything (i) specifically designed or modified
  for a military or spacecraft-related end-item or
  (ii) otherwise declared by DDTC to be
  ITAR-controlled is always ITAR-controlled until
  and unless DDTC declares otherwise in a CJ
  determination, regardless of
• Incorporation into civilian end-item (foreign or
  domestic) (Compare to EARs Interpretation No. 2)
• Size or percentage of value in end-item (no de
  minimis rule in ITAR)
• Age (no statute of limitations in ITAR)
• Level of sophistication (even if more
  sophisticated civilian items exist)
• Foreign or domestic availability
• Specific identification on EARs CCL

11
EARs Interpretation No. 2

• Rule is almost exactly the opposite of the EARs
  Interpretation 2 regarding the classification
  of parts of machinery, equipment, or other
  items.
• In instances where one or more assembled
  machines or units of equipment are being
  exported, the individual component parts that are
  physically incorporated into the machine or
  equipment do not require a license. The license
  or general exception under which the complete
  machine or unit of equipment is exported will
  also cover its component parts, provided that the
  parts are normal and usual components of the
  machine or equipment being exported, or that the
  physical incorporation is not used as a device to
  evade the requirement for a license. 15 C.F.R.
   770.1(b)(1).

12
Implication Reaches Far Down

• Every USML subcategory controls components,
  parts, and accessories specifically designed
  or modified for a defense article listed
  elsewhere in that category.
• Examples of parts cited in the ITAR are
  rivets, wire, bolts, etc. ITAR 121.8(d)
• An example of an accessory is special paint.
  ITAR 121.8(c)
• To repeat The QRS-11 principle reaches deep
  into far less sophisticated widgets until and
  unless DDTC is willing to declare otherwise.

13
Industry Impacts

1. ITAR-Free Certifications
2. ITAR-Free Compliance Clauses in Purchase/Sale
   Contracts
3. Difficult jurisdictional reviews of ancient parts
   or components
4. Imposition of screens between military and
   civilian sides of shops
5. Foreign purchaser decisions to exclude US
   suppliers

14
More Industry Impacts

1. Re-engineering end-items to develop components
   with a completely civilian pedigree
2. More caution and clarity in contracts for
   development of new parts and components
3. Reminder that DDTC jurisdictional determinations
   are not judicially reviewable

15
Impact 1 ITAR-Free Certifications

• Supplier hereby represents and warrants that all
  end-items (including their parts, components,
  accessories, and attachments), software,
  firmware, systems, materials, and/or technical
  data (collectively Items) that it has sold to
  or otherwise provided Purchaser are not subject
  to the jurisdiction of the International Traffic
  in Arms Regulations (ITAR) at 22 C.F.R. pts.
  120-130. In particular, Supplier represents and
  warrants that it has not sold to or otherwise
  provided Purchaser with Items that were defense
  articles identified on the ITARs United States
  Munitions List at 22 C.F.R. 121.1 or otherwise
  specifically designed, developed, configured,
  adapted or modified in any way for a military
  application, military end-item, or a commercial
  satellite, spacecraft or launch application.

16
Impact 2 ITAR Clauses in POs

• Each Party represents that (i) the Items, and
  the parts and components thereof, it is providing
  under this Agreement are not defense articles
  as that term is defined in 22 C.F.R. 120.6.
  The Parties acknowledge that this representation
  means that an official capable of binding the
  Party providing such Items knows or has otherwise
  determined that such Items, and the parts and
  components thereof, are not on the ITARs
  Munitions List at 22 C.F.R. 121.1. Each Party
  agrees to reasonably cooperate with the other in
  providing, upon request of the other Party,
  documentation or other information that supports
  or confirms this representation.
• To the extent that such Items, or any parts or
  components thereof, were specifically designed or
  modified for a military end-item or application
  or civilian spacecraft- or satellite-related
  application, the Party providing such Items shall
  notify the other Party of this fact and shall
  also provide the other Party with written
  confirmation from the United States Department of
  State that such Items, and all such parts or
  components thereof, are not subject to the
  jurisdiction of the ITAR.

17
Impact 3 Difficult Jurisdictional Reviews

• Parts/components may have designed years or
  decades ago
• Companies are bought and sold
• Engineers retire, resign, move on, forget
• Records and business plans unclear about the
  intent behind why a part or component was
  originally designed for military and later
  civilian applications discovered? Always for
  both? Predominant military?
• DDTCs presumption is that it is ITAR-controlled
  if you say I dont know in CJ request

18
Impact 4 Internal Screens

• Creation of screens so that widgets originally
  designed or modified for a military end-items do
  not find their way in to civilian end-items being
  created
• Forces the re-invention of widgets for civilian
  applications without benefit of past RD
• Forces difficult re-consideration of all data
  directly related to original widget even when
  there is little difference between widget used in
  civilian end-item

19
Impact 5 Exclusion of US Suppliers

• Unlike the EAR and the OFAC sanctions
  regulations, the ITAR does not contain a de
  minimis rule.
• Thus, foreign and domestic manufacturers do not
  want to buy ITAR-controlled parts that will
  effectively taint their civilian end-items.
• Remember ITAR requires foreign persons to get
  DDTC licenses to re-export defense articles, even
  if a component in a foreign-made civilian
  end-item. ITAR 127(a)(3).

20
Impact 6 Re-engineering

• Instead of subjecting a part arguably
  specifically designed for a military end-item
  that is now useful for a civilian application to
  DDTC licensing, companies will simply re-invent
  the same part specifically for a civilian
  end-item without any reference to data related to
  original part.
• Often considered quicker to abandon use of old
  parts and re-engineer than to prepare a CJ and
  wait for result.
• Irony is that newly designed part is often better
  than original part.

21
Impact 7 Contract Clarity

• The intent behind why a part or component is
  being designed or modified is set forth more
  clearly in contracts to avoid any future doubts
  as to whether it is ITAR- or EAR-controlled
  particularly in USG contracts.
• Internal jurisdictional determination records are
  becoming more explicit in explaining the
  corporate intent behind why a widget was designed
  and developed. Duel-use business plans are being
  written more precisely.

22
Impact 8 No Judicial Review

• DDTC has complete discretion in determining what
  is and is not a defense article. Indeed, other
  than in criminal cases, judicial review of DDTCs
  jurisdictional determinations is prohibited by
  law. (22 U.S.C.  2778(h)). In other words,
  there is no authority to sue DDTC if you believe
  it is not applying the USML as written (although
  there is room to try).
• Thus, when doing a jurisdictional analysis, one
  must not only consider the ITARs words but also
  any DDTC interpretations of or positions
  regarding the words. (See Law and Lore Chart)

23
Two Other Comments on DCL

• No scienter requirement in Part 127 they are
  strict liability provisions. That is, there is
  no need to find a knowing or a willful
  violation to violate most sections of Part 127.
• DDTC expectation that one who sells a civilian
  end-item containing an ITAR-controlled component
  must notify the domestic buyers that the
  component in the civilian end-item will require a
  DDTC license to export. DCL 14 and 33 and L-3
  DCL 44.

24
Goodrich/L-3 DCL and Materiality

• Company submitted a CJ Request that was drafted
  by outside counsel. It described the
  capabilities of the CSIS, but did not state that
  the devices contained QRS-11s. DCL 53.
• DDTC said that this was a material omission.
• For a statement to be material, it must have a
  natural tendency to influence, or be capable of
  influencing, the decision.
• Not necessary that Government was actually
  influenced by statement.
• Keep these two points in mind in all
  correspondence with US Government.

25
Aiding and Abetting Amendment

• Outside counsel was not charged, but nonetheless
  alleged to have aided and abetted the making of
  the material omission. DCL 53.
• On April 21, 2006, DDTC amended the ITAR
  127.1(d) to prohibit anyone from knowingly (in
  addition to then-existing willfully) aiding,
  abetting, causing, counseling, permitting (etc.)
  an ITAR violation. 71 Fed. Reg. 20534.
• Suggests DDTC willing to prosecute civilly anyone
  who assists in (or causes, counsels, or
  permits) an act of another person that DDTC
  believes constitute an ITAR violation even if
  there was no bad (willful) intent to violate
  the ITAR when the assistance was provided. One
  could violate the ITAR without even knowing it!